Economist has fix for global crisis: invest in poor nations

WASHINGTON — The World Bank's chief economist on Monday proposed an alternative approach to digging the world out of the financial crisis, saying that the United States, China and other countries should invest in the development of poor nations, because eventually those countries would become customers.

Justin Yifu Lin said that the global financial crisis should have a global solution, arguing that if low-income countries get investments in electric power, highways and other fundamentals, they'll escape poverty, grow in a sustainable way and be able to buy exports from countries such as the United States.

The World Bank official noted that International Monetary Fund chief Dominique Strauss-Kahn said Sunday that the U.S., Europe and Japan were "already in depression." Lin, a University of Chicago-trained economist from China, said that while he expected the global economy to recover next year, there were many uncertainties ahead.

This economic crisis is the worst one since the Depression, and if it goes on for a long time it will deprive developing countries of the chance to get out of poverty, Lin said. He said that his plan would shorten the recovery time and "pave the ground for long-term, inclusive and sustainable growth for all."

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"I'd like to propose to you a new initiative, and this new initiative is for the purpose of one stone to kill not only two birds, but maybe four or five birds," he said.

As the poorer countries grow, he said, their demand for goods will grow, too. Eventually, they'll buy the exports of high-income countries.

Weak demand is part of a vicious cycle that's at the heart of the crisis, he said in a speech mainly to economists, diplomats and journalists at the Peterson Institute for International Economics, a Washington research organization.

As people lose pensions and job security, they buy less, and companies are left with excess goods. The profitability of the companies decreases, jobs are cut further, people become more conservative about spending and consumption drops even more.

The World Bank official argued that wealthy countries have a limited need for more investment in highways, ports and other infrastructure.

The one place they still need to invest is in the green economy: energy efficiency and renewable energy. "The climate crisis should be high on the agenda," Lin said, and aid to developing countries through the World Bank and other development banks will try to build in solutions to global warming in infrastructure funding.

Lin said that World Bank President Robert Zoellick's proposal for high-income countries, led by the United States, to contribute 0.7 percent of their stimulus spending to a global recovery fund was "in the right direction."

"However, considering the global crisis we are encountering now, I think we need to be more aggressive," Lin said. "We need to be more imaginative. I'd like to propose a global recovery fund in the spirit of the Marshall Plan," the U.S. aid plan to Europe that helped prevent starvation, repair war-ravaged cities and begin economic reconstruction after World War II. European countries also bought U.S. products at that time.

Lin said that the United States, the euro-zone nations, Japan and "reserve-rich" countries such as China and the oil-exporting nations should invest $2 trillion over the next five years to help low-income countries develop. The fund wouldn't be a grant but rather a loan, he said.

Investments in low-income countries have a high rate of return because they do more to promote growth, Lin said.

He urged the United States to lead the effort.

The stimulus plan that's being debated in the Senate and the version that the House of Representatives passed don't contain anything like what he proposed, however.

Before Lin joined the World Bank on May 31 as its chief economist and a senior vice president, he was a professor at Peking University who advised the Chinese government through a research center, the China Center for Economic Research, which he helped establish in 1994. He gave China's story as an example of how his plan could work.

China entered a period of deflation — collapsing wages and prices across the economy — in 1998, in the Asian financial crisis. The government adopted an aggressive stimulus plan and invested in highways, ports, telecommunications and education. For example, Lin said, the country went from having 2,900 miles of highways in 1998 to more than five times as much in five years as a result of its stimulus.